Prudential 2007 Annual Report Download - page 51

Revenues
2007 to 2006 Annual Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $169 million,
from $7.812 billion in 2006 to $7.981 billion in 2007, principally driven by the $108 million increase in net realized investment gains and
an increase of $109 million in net investment income. The increase in net investment income reflects higher income on joint venture and
limited partnership investments and public equity investments. These increases in revenue were partially offset by a decrease in premiums,
with a corresponding decline in changes in reserves, as the policies in force have matured or terminated. We expect this decline in
premiums for this business to continue as these polices continue to mature or terminate.
2006 to 2005 Annual Comparison. Revenues decreased $214 million, from $8.026 billion in 2005 to $7.812 billion in 2006.
Revenues in 2006 reflect a decrease of $155 million in net realized investment gains and a decrease of $41 million in net investment
income. Additionally, results in 2006 reflect a decline in premiums, with a corresponding decline in changes in reserves, as policies in force
in the Closed Block have matured or terminated.
Benefits and Expenses
2007 to 2006 Annual Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $282
million, from $7.409 billion in 2006 to $7.691 billion in 2007. This increase reflects a $213 million increase in dividends to policyholders
reflecting an increase in dividends paid and accrued to policyholders primarily due to an increase in the 2008 dividend scale, as well as an
increase in the cumulative earnings policyholder dividend obligation expense of $92 million. Policyholders’ benefits, including changes in
reserves, increased $54 million primarily reflecting higher claim costs in 2007 that continue to increase with the aging of the Closed Block
policyholders, and a reserve release in 2006.
2006 to 2005 Annual Comparison. Benefits and expenses decreased $135 million, from $7.544 billion in 2005 to $7.409 billion in
2006, as dividends to policyholders decreased $135 million, reflecting a decline in the policyholder dividend obligation expense of $169
million, partially offset by a $34 million increase in dividends paid and accrued to policyholders.
Income Taxes
Shown below is our income tax provision for the years ended December 31, 2007, 2006 and 2005, separately reflecting the impact of
certain significant items. Also presented below is the income tax provision that would have resulted from application of the statutory 35%
federal income tax rate in each of these periods.
Year ended December 31,
2007 2006 2005
(in millions)
Tax provision ......................................................................................... $1,245 $1,245 $ 803
Impact of:
Non-taxable investment income ....................................................................... 253 252 185
Foreign taxes at other than U.S. rate ................................................................... 68 58 (61)
Low income housing and other tax credits .............................................................. 67 51 53
Change in valuation allowance ....................................................................... 32 2 (76)
State and local taxes ................................................................................ (21) (21) (22)
Non-deductible expenses ............................................................................ (10) (45) (70)
Completion of Internal Revenue Service examination for the years 1997 to 2001 ................................ — — 720
Other ........................................................................................... 6 (4) (36)
Tax provision excluding these items ....................................................................... $1,640 $1,538 $1,496
Tax provision at statutory rate ............................................................................ $1,640 $1,538 $1,496
We employ various tax strategies, including strategies to minimize the amount of taxes resulting from realized capital gains.
We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB Statement
No. 109 on January 1, 2007. For additional information regarding the adoption of this guidance, see Note 17 of the Consolidated Financial
Statements.
The dividends received deduction reduces the amount of dividend income subject to tax and in recent years is the primary component
of the non-taxable investment income shown in the table above, and, as such, is a significant component of the difference between our
effective tax rate and the federal statutory tax rate of 35%. In August 2007, the Internal Revenue Service, or Service, issued Revenue
Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the dividends received
deduction related to variable life insurance and annuity contracts. In September 2007, the Service released Revenue Ruling 2007-61.
Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the Service
intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in
determining the dividends received deduction related to variable life insurance and annuity contracts. These activities had no impact on our
2007 results.
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